2018 MTBPS: Parliamentary Budget Office & FFC briefing

Meeting report

Parliamentary Budget Office presentation
Mr Seeraj Mohamed, Deputy Director, Economics, PBO, took the Joint Committees through a presentation on the 2018 Medium-Term Budget Policy Statement (MTBPS) analysis. The 2018 MTBPS prioritises three interlinked policy areas: implementing the President’s stimulus and recovery plan; improving governance and financial management in all spheres of government to support service delivery; and reforming state-owned companies. However, the 2018 MTBPS made no mention of the Mandate Paper, and hence the question that remained was: What is the position of the Mandate Paper? An analysis of the performance on the Medium-Term Strategic Framework (MTSF) identified risks of not achieving the targets by 2019. Most of the risks relate broadly to infrastructure, human resources and administrative matters, which were identified as priorities in the MTBPS. The MTBPS also addresses some of the matters such as the creation of additional positions in health and the effective spending of the skills development levy. Monitoring needs to be done for specific matters in order to achieve the targets by 2019.

On the economic stimulus and macroeconomic policy, much of the stimulus is supply-side measures such that inadequate attention was given to demand-side measures for poor households and growth of SMMEs. More so, the MTBPS does not provide enough support to the economic cluster and industrial policy given that manufacturing is an engine of growth because of its strong linkages with other sectors. Therefore, the question that remains in this regard is whether government’s fiscal policy approach is still guided by the principle of counter-cyclicality. It was unclear if fiscal consolidation had replaced government’s fiscal policy approach; fiscal consolidation has put downward pressure on aggregate demand and GDP growth. The PBO believed shovel-ready infrastructure projects have potential to stimulate growth in the short-term. However, the impact of the stimulus may be limited because it does not adequately stimulate aggregate demand in the short to medium-term. The stimulus and MTEF could support industrial transformation as well as mining and agriculture but there was a danger that the stimulus could lead to more reliance on primary exports and short-term financial inflows.

On matters for consideration in relation to the VAT, the proposal to increase the tax had been implemented without Parliament’s approval. Therefore, Parliament may consider reviewing and re-wording the VAT Act together with any other Act that allows the Executive to implement proposals before the conclusion of due parliamentary process approving such legislation. Notably, targeted spending on low-income households may be more effective than zero-rating due to the unintended consequences. Alternatives include doing away with zero-rating and refining the current zero-rated items basket instead of adding to it.

On the government wage bill, Parliament should seek information about the productivity and efficiency of public sector expenditure including wage bill. Productivity and efficiency for major sectors, education and health should determine level of service delivery. Other factors may contribute towards a more productive and efficient public expenditure, including proper infrastructure, better management and monitoring. Discussions on wage bill should consider the following: policy decisions not just the size of the increase in the wage bill; sector analysis; and productivity. On infrastructure spending, government committed to publishing expenditure reports on infrastructure projects and consideration was being given to increasing municipal borrowing and own revenue for infrastructure spending. The PBO therefore recommended that government improve capacity in National Treasury for infrastructure development support and provision of support and oversight to recipients of municipal infrastructure grants.

Discussion
Ms T Tobias (ANC) said the stimulus package announced by the President recently would have to spearhead the industrialisation project and stimulate aggregate demand. She wanted to know whether the salary increments for middle-managers in provinces related to promotions.

A DA Member welcomed the infrastructure spend as it would stimulate the economy. However, the programmes had to be closely monitored to ensure people’s lives are bettered. He asked for suggestions on how to increase government revenue without increasing the VAT.

Mr A Lees (DA) commented on the VAT increase. There was no way the money could be recovered if the hike is rejected by Parliament. He asked what the impact of reverting to 14% VAT would be to future revenue. Was it possible at this stage? Why was it that the PBO had not spoken to debt levels?

Mr D Maynier (DA) asked why the PBO had ignored the request made during a previous meeting to provide an analysis on whether the country’s debt levels are reasonable. The PBO was supposed to be independent but it was not.

Mr N Gcwabaza (ANC) asked for suggestions on interventions Parliament should be bringing forth. He asked for proposals about new areas of industrialisation that could be targeted. Whereas a lot was being said about retaining existing jobs, very little was being said about how to create new jobs.

Ms D Senokoanyane (ANC) asked for views about how poor households could be cushioned through targeted approaches following the VAT increase.

Mr A McLaughlin (DA) asked why the Mandate Paper had not been referred to in any respect by the Minister during the MTBPS. Was the paper of any use then? Where to from here? What was the economic trajectory going forward given that it appeared there had been no turnaround?

Ms Phosa asked if there was an alignment between the MTBPS, the Mandate Paper and the National Development Plan (NDP). Was Treasury still guided by the Mandate Paper? What was the paper’s status given there was no reference made to it? She asked if the Committees could get the quarterly expenditure reports. Has PBO picked up any virement deviations in its analysis? To what degree does the MTBPS address concerns expressed by ratings agencies? Members would expect written responses to some of their questions owing to time constraints.

Mr De Beer asked what lessons could be drawn from countries that went through the very same circumstances South Africa finds itself in. How far are we from the fiscal cliff? He pointed out that it was the Committees’ role to exercise effective oversight on departments.

Mr Carrim said there were suggestions that the VAT does not have to be declared by the Minister without consulting Parliament. What further targeted expenditures could be effected to alleviate the effects of the VAT increase on the poor?

Ms N Ntantiso (ANC) asked for facts and an analysis on E-Tolls as discussions on them were shrouded with a lot of controversy?

Mr F Essack (DA) asked if the President’s stimulus package was realistic and attainable currently in terms of income inflows in the short-term.
           
Ms Nelia Orlandi, Deputy Director: Public Policy, PBO, agreed there was no mention of the Mandate Paper in the MTBPS. The PBO hoped to see a robust alignment of budget policy, the Mandate Paper and the NDP. The PBO does not know whether there would be a Mandate Paper again in future. It is very complex to curb the wage bill without an extensive public sector analysis. The scant reporting on the progress of government’s infrastructural projects was a shortcoming that needed to be addressed.

Mr Mohamed said there had been notable shifts in economic thinking on management of fiscal and monetary policy. Therefore, approach to fiscal consolidation had to be clarified by Treasury. What constitutes reasonable debt levels was context-dependent and a matter of policy. There are clear ideas in the stimulus package about what areas could be explored for targeted interventions to low-income earners.

Mr Carrim interjected and indicated academic arguments particularly on the VAT increase would not assist the Committees at this stage. He asked the PBO to furnish the Committees with clear suggestions on how to alleviate the effects of the VAT increase within two days. The PBO had been asked for this for months. He appealed to the PBO to give presentations that are more inclined to the issues the Committees were dealing with.

A National Treasury Representative, in response, said the Mandate Paper was taken into account during formulation of the MTBPS and the Department of Planning, Monitoring and Evaluation (DPME) was part of the processes. DPME was responsible for the formulation and implementation of the Mandate Paper.

Financial and Fiscal Commission presentation
Dr Hammed Amusa, Program Manager: Macroeconomics and Public Finance Unit, FFC, pointed out that the 2018 Medium Term Budget Policy Statement (MTBPS) was formulated in an economic environment characterised, inter alia, by extremely low growth, escalating public debt, and low levels of investment. The ability of government to address the key socioeconomic challenges – unemployment, poverty, and inequality- was severely compromised furthermore by weak governance during most of the past decade, reflected, amongst other things, in public and private sector corruption, the failure of state-owned entities to deliver on their development mandate, and the rapid decline of the South African Revenue Services (SARS) from its pinnacle of efficiency and effectiveness to a situation where it is clearly failing badly on its revenue collection mandate. Given this scenario, the government’s short-term prognosis is understandably pessimistic in terms of its growth projections, and hence its ability to generate sufficient levels of revenue both to meet growing expenditure needs and pay off debt at a more rapid rate than it has been able to do so up to the present time.

With respect to the economic challenges facing the country, the Commission recommended addressing structural bottlenecks in order to boost growth. Structural reforms should focus on accelerating private investment, invigorating product market competition (particularly in network industries such as telecommunications, energy, logistics and water), correcting skills mismatches, and confronting and tackling corruption. There is a need to build on comparative advantages to develop new domestic and international markets through higher productivity and innovation instead of depending on higher commodity prices. Clarifying the framework governing the proposed “land expropriation without compensation” to prevent uncertainty by focusing it on intensifying agricultural productivity, enhancing land administration and reinforcing security of tenure is also critical. The Commission also reiterated the need to build fiscal space through conservative debt levels and managing downward expenditure diversion to debt service costs, reducing the wage bill through natural attrition coupled with a review of government’s functional organisation and abandoning the strict linking of wage increases to the consumer price index, deepening the fight against corruption, assessing the recent increases in the scope of service delivery priorities, addressing governance issues and rethinking the business models of state-owned entities.

It is not apparent that the current stimulus package was underpinned by the earlier programme review envisaged by the Commission. Stimulus interventions that are superimposed on a structurally deficient economy will yield less than desirable results. Essentially, there are two fundamental tenets of a stimulus package from a fiscal policy perspective that is, lowering taxes and increasing spending. Counter-intuitively, the current fiscal policy trajectory has been one of contraction, with the recent increase in Value Added Tax (VAT) and the ongoing budget consolidation programme. On enhancing efficiency in the public sector, the Commission advised that in order to ensure real productivity within the public sector, value for money must be sought more resolutely, for example, by costing institutional outputs and assessing performance and then comparing them, being mindful to innovate for constant improvement.

With regard to the provincial wage bill, it is evident that that over half of their budgets are dedicated to personnel. A key risk to the provincial government fiscal framework is the higher than anticipated wage agreements for which additional funding will not be received. The Commission is of the view that provinces will have to carefully manage this pressure and practise financial prudence to ensure that wage pressures do not divert resources away from key health and education inputs Local Government. The Commission notes the subdued growth in allocations to the Local Government sphere in 2019 MTEF. In a fiscally constrained environment, where resources available for sharing are progressively diminishing, it is imperative that the efficiency problem in the local government is eliminated. Section 195(1) (b) of the Constitution implores all organs of state to use resources efficiently and effectively. Essentially, the production and delivery of public services within the government should be provided at the minimum opportunity cost, and cases of unproductive, wasteful, irregular or fruitless expenditure, duplication and wastage in procurement processes, among others, should be eradicated.
 
Discussion
Ms Tobias said the FFC analysis was insightful. She pointed out that the largest share of investments comes from the private sector. She asked for comments on the performance of municipalities with regards to equitable shares. Equitable share funds were not being spent judiciously; the recent example being the depositing of those funds to VBS Bank by some municipalities. The overemphasis of infrastructure development rather than investments as a whole should be explored further. Monitoring the implementation of government projects was what is crucial.  

Mr O Terblanche (DA) asked for the FFC’s views about the impact of policy uncertainty as well as perceived attacks on property rights in South Africa on economic growth.

Mr McLaughlin asked for views on the poor performance of municipalities. Would increasing grants to municipalities turn the situation around? How could an effective turnaround be effected?

Mr Lees highlighted the risks at SOEs. The challenge was that money was continually being poured into them instead of jettisoning these failed entities. He asked if there was room to differentiate these SOEs and thereby reducing the risks they impose on economic growth.

Mr Maynier said given the national debt was expected to escalate in the medium term; did the FFC believe South Africa’s debt levels and debt service costs were reasonable?

Mr Gcwabaza asked what should be done to reduce the impact of global currency volatility in domestic markets. On the reduction of the wage bill through attrition, would this not jeopardise frontline service delivery?

Ms Senokoanyane asked for the FFC’s thinking on the sustainability and affordability of fee-free education.

Ms Phosa said the presentation by the FFC was insightful. She asked which policy uncertainties the FFC believed government should focus on. What was its advice in relation to the reconfiguration of SOEs as highlighted by the Minister of Finance? How could debt costs be possibly reduced?

Prof Daniel Plaatjies, Chairperson, FFC, said the FFC would get back to the Committee on the various issues raised by way of written responses. However, it was problematic that most of the recommendations from the FFC were not being taken into account particularly by the finance committees. A lack of capacity within municipalities was a challenge which required due attention. The capacity question on the part of councillors was a key issue as it results in information asymmetry between councillors and civil servants. Instances where councillors are unable to comprehend crucial documentation in the day-to-day running of municipalities was prevalent. Mechanisms to address capacity constraints needed to be looked into. It was hoped that the SOE council established by the President would deal with some of the challenges in public entities as it was expected to look into their financial sustainability and developmental mandates. There needs to be a differentiation and rationalisation and possibly closing down of some SOEs, especially within provinces. The FFC would submit written responses to the Committees within five working days.

Dr Amusa, speaking on public wage bill, which accounts for over half of provincial budgets, said it was one of the key risks to the provincial government's fiscal framework. This is because national government does not have additional funding to support the higher wage agreement, signed in June. The Commission was wary of how this will play out for departments which need to reprioritise programmes to fund wage increases. The Commission recommended that government departments carefully manage this pressure and practice financial prudence, to ensure wage pressures do not divert resources away from key services like health and education. The commission also recommended that reprioritisation be monitored to ensure it does not compromise service delivery.

Ms Phosa appreciated the insightful engagements and thanked everyone for their inputs.  

The meeting was adjourned.